It wasn't too long ago that Wall Street had given up on Meta Platforms (META 0.43%). The social media company had shed over 60% of its value in 2022, and management announced that the following year would include a sharp pivot toward slashing costs.
What a difference a year makes. The Facebook parent's stock is up nearly 180% in the past 12 months and recently touched a record $500 per share. Let's look at whether or not that rally means investors' best returns are in the past for this high-flying stock.
Rallying on strength
As you might expect, the stock's rally has been powered by some great news around Meta Platforms' growth. Its social media apps, anchored by Instagram and Facebook, are seeing solid engagement, with over 3 billion users checking in with the apps daily.
Investors were more thrilled to see advertising revenue jump to $132 billion in 2023 from $114 billion a year earlier. That 15% spike outpaced the company's user growth because Meta boosted the volume of advertisements it showed.
It's great news for the business that the company could show many more ad impressions without sacrificing user gains. "We had a good quarter as our community and business continue to grow," CEO Mark Zuckerberg said in an early February press release.
Rebounding margins
There's even more to like about Meta Platforms' expanding earnings power. It's true that the Reality Labs division, home to products like Meta's virtual reality headsets, reported widening losses in 2023. But the overall business still nearly doubled its earnings this past year.
META operating margin (TTM) data by YCharts; TTM = trailing 12 months.
Operating income jumped to $47 billion from $29 billion, in fact. That translates into a 35% margin in operating profit. Meta Platforms did better during the pandemic peak, of course. And there are other tech leaders, like Microsoft, with higher profitability right now.
Yet, Meta is taking big steps back toward the record 50% operating margin that investors saw before the pandemic struck. Most Wall Street pros are looking for earnings per share to rise about 33% this year, to $20.
Price and value
There's a clear risk of buying this stock during a time of elevated optimism that will necessarily limit your returns. Meta Platforms' shares are priced at 10 times annual sales, or about the highest valuation seen to date. You could have snapped up this business for around 3 times revenue back in early 2023, after all.
Yet Meta's stock spike hasn't been powered simply by high expectations around the potential impact from artificial intelligence (AI). There's more substance to this rally. The business is accelerating growth in its user base and in its core advertising business. While it can't keep showing more and more ads to users, Meta has room to continue improving on sales as pricing trends for digital ads strengthen in 2024.
There's a good chance that margins will move closer to 50% of sales in the next few years, meanwhile, as its research and development investments start paying bigger dividends. In that scenario, Meta Platforms could easily earn its premium of 33 times earnings and 10 times sales over the coming years. So $500 per share isn't too much to pay for this impressive growth stock.
